Analysis: Payment by results - can it work for charities?

The government is bullish about paying for services by results. Andy Hillier hears contrasting views about it from sector leaders and offers two case studies and ten do's and don'ts

Payment by results

The first publicly funded payment-by-results scheme is believed to have begun in 1863, when government funding of Victorian schools was determined partly by the strength of their exam results. It was abandoned after 30 years for being excessively bureaucratic.

This has not dampened the present government's enthusiasm for PBR, which is now used in contracts by six Whitehall departments. Last week the Prime Minister, David Cameron, said he wanted PBR to feature strongly in a big increase in work with offenders by the private and voluntary sectors.

In the past few months, however, more charities and not-for-profit organisations have raised concerns about PBR contracts. A National Council for Voluntary Organisations survey, for example, found that seven out of 10 charity subcontractors feared that their PBR contracts to deliver the government's Work Programme were at risk of failure, citing problems ranging from lack of referrals to non-payment.

Steve Kerr, policy officer at London Voluntary Service Council, a representative body for community groups in the capital, believes that too many PBR contracts place unrealistic demands on voluntary sector providers. In the summer, two LVSC members closed down partly because of PBR contracts - Red Kite Learning, an education and employment charity, and Eco-Actif Services, an employment-based community interest company (see case study below). Kerr says both struggled to raise the working capital to fund their work for a year or more until they received full payment.

"Organisations understand the policy driver behind PBR and the need to get value for money," he says. "But in simple terms, you're only getting the money back months, if not years, after you've delivered the programme. Under the Work Programme, subcontractors receive their first payments after six months, and it can take up to two years for charities to recover all their fees. Most charities don't have the level of reserves to run that sort of contract."

The sheer complexity of PBR contracts also deters many small and medium-sized organisations from bidding. The contracts come in many forms: in some, results determine less than 25 per cent of the value of a contract; in others it is nearly all the value. The way success is determined can also vary widely: some contracts have a set of clearly defined targets; others have an array of complex indicators, over which the provider might have little control. "Boards of trustees are understandably wary of taking on such contracts because they don't fully understand the level of risk involved," Kerr says.

Simon Antrobus, chief executive of Addaction, a national drug and alcohol treatment charity, says the sector should not be too deterred by PBR. His charity has been delivering PBR contracts for local authorities and other agencies for the past three years. "In the main, it has been fine," he says.

He believes the Work Programme is unusually complex and the success of PBR should not be judged by it. But he says service commissioners do need to think carefully about the structure of PBR contracts, and that Addaction has more than once turned down the chance to bid for them. "When we've looked into the details, they don't stack up because they're placing unrealistic outcomes on staff or on service users," Antrobus says.

Evan Jones, head of community services at St Giles Trust, a charity that works with ex-offenders, says it has been stung by PBR. Speaking at the Third Sector Payment by Results workshop this month, he said St Giles had bid successfully for a programme for getting young people into work, but made mistakes when tendering. "We underestimated the time it took to get young people into work," he said. "As a result, no one won - we had to reduce staff to cut our costs and the project didn't produce the expected results."

The charity, which is piloting the government's social impact bond scheme at HMP Peterborough, has learned to be more business-minded. "We've managed to get clauses taken out of contracts when we've realised they're unworkable," he said. "We now spend quite a lot on legal advice to check the detail. We used to just sign contracts, but not any more."

PBR contracts have also had unintended consequences on St Giles staff, said Jones: "We've found that staff were rushing some conversations with clients because they were conscious of hitting targets." Antrobus of Addaction also says that PBR contracts, if not managed properly, can focus staff on results and put pressure on them to deliver "unrealistic outcomes".

Kerr of the LVSC says that access to finance remains a barrier. "Funders such as Big Society Capital exist, but it's not working well at the moment for delivering PBR," he says. "Trying to find a bank or other lender to support this type of work is really hard."

Ben Jupp, a director at Social Finance, a not-for-profit organisation that has helped to arrange finance for third sector organisations delivering PBR contracts, told the Third Sector workshop that finance was available, but charities should engage funders right at the start - social funders would naturally be wary of investing in organisations already in difficulty, he said.

"There's a difference between seeking social finance before you enter into a PBR contract and seeking finance halfway through the process because you did not read all of the small print and are running out of funding," he said.

Kerr believes that if charities are working as subcontractors, as in the Work Programme, the prime contractor should offer financial assistance. "The primes will generally have the financial muscle to help their subcontractors by providing up-front payments," he says. "At the moment, we're seeing small and medium-sized charities facing the same amount of risk as the prime contractors, which is not what we were expecting."

Karl Wilding (right), head of policy, research and foresight at National Council for Voluntary Organisations, is also concerned about the level of risk under PBR. "We seem to be transferring the risk from those who are most able to bear it, such as local authorities, to charities that are least able to bear it."

He stresses that commissioners need to consider alternatives to PBR. At the moment, he says, the trend is for contracts to have an element of PBR, even though there's little evidence to show that it delivers better results or value for money. "Public policy can be a bit herd-like," says Wilding.

"PBR has its place, but there still needs to be a place for grants. In many cases, standard contracts would be appropriate."

Jupp of Social Finance believes PBR contracts can help effective third sector organisations to thrive in the current economic climate, but adds that they must analyse the detail and think through the implications. "PBR is like a strong medicine," he told the Third Sector workshop. "It can help shift the way a service operates, but if it's not rightly applied then there are all sorts of nasty side-effects."

THE DO'S AND DON'TS OF PBR CONTRACTS

Advice from expert speakers at Third Sector's recent PBR workshop

1. PBR contracts tend to work best when the results can be judged on a small number of clear indicators. Always question contracts that are based on numerous complex indicators.

2. Don't be afraid to negotiate with commissioners if you think the terms of the contract are unrealistic - many commissioners are still learning about how to structure PBR contracts and should take on board any criticisms.

3. Make sure that you have the processes in place to record your outcomes accurately before you enter into a PBR contract. Invest in staff training and the necessary recording tools if you need to improve the way you measure performance.

4. Work out carefully how long it will take to achieve the desired outcomes and whether you will need to raise additional finance before you enter into a PBR contract.

5. Work out what your monthly cash flow will be over the terms of the contract and establish what would happen if you received only the minimum payment. And don't be tempted to bid too low to win contracts.

6. Approach social funders as early as possible - preferably while putting together your bid - if you require additional finance to undertake a PBR contract.

7. Always get a legal adviser to read through the terms of the contract before you agree to sign. It's worth setting aside money for legal advice or trying to set up a pro-bono arrangement with a legal firm.

8. If you're working as a subcontractor, don't be afraid to ask the prime contractor to amend its terms or ask it for financial support if you're struggling to hit targets or maintain your cash flow.

9. PBR contracts can encourage staff to concentrate on outcomes, rather than delivering a high-quality service. Make sure that you monitor staff to avoid any unintended consequences.

10. Don't sacrifice your values. If you think that a PBR contract is forcing your organisation to work in a way that's harmful to beneficiaries or goes against your objects, speak up and consider walking away from it.

Case study: 'We couldn't be rescued'

In July, Eco-Actif Services, a community-interest company delivering employment programmes, in Sutt on, Surrey, went into liquidation after it was unable to secure sufficient working capital.

The company, which had a turnover of more than £700,000 and employed 14 staff, was involved in the delivery of the Work Programme and the Families Programme, two payment-by-results schemes.

About 30 per cent of its costs were covered up front in the two programmes, with the remaining 70 per cent paid based on its results.

Towards the end of last year, it started to run out of money and approached social lenders for a loan to help it cover its running costs until its next results-based payments came through. But it was unable to attract investment. Anna Burke (right), the former managing director of Eco-Actif Services, says: "At the time, our prime contractor, A4e, was being investigated and there were fears that we would not get our money from it - so we were considered too high a risk by investors. Payment by results didn't close us, but it made it impossible for us to be rescued."

She says she doesn't oppose the use of payment by results, and that it's right that organisations are held accountable. But she believes that commissioners need to be realistic when drawing up contracts. "We previously delivered payment-by-result contracts where we were paid 70 per cent of the costs up front and 30 per cent based on our results," says Burke. "We managed to do well under that arrangement."

Burke also believes that more financing needs to be made available to not-for-profit organisations delivering PBR contracts. "I honestly think that unless something is done only the bigger players in the field will have the capacity to deliver PBR contracts," she says.

Case study: 'It's working well, but more up-front funding would be better'

Penrose, a not-for-profit company that works with former offenders, has been awarded a PBR contract by Lewisham Council to help keep repeat offenders out of prison.

The scheme is part of the Justice Reinvestment Model, a Ministry of Justice pilot programme running in Greater Manchester and the London boroughs of Croydon, Hackney, Lambeth, Lewisham and Southwark between July 2011 and July 2013.

Under the contract, Penrose must keep 300 repeat offenders, of whom 150 have to have come directly from prison, out of prison for a year. The organisation does this by providing support to offenders, including help to find accommodation and overcome any addiction problems.

Penrose receives a core payment towards its service costs and a separate payment for every offender who stays out of prison and remains in its programme. The amount varies according to the offender, the complexity of their case and their offending history. If it fails to meet its targets, it must fund the difference.

Gill Arukpe (right), chief executive of Penrose, says the system is working well. Since July 2011, it has hit its target of keeping 300 offenders out of jail for a year, of which 152 had come from prison. "Working this way seems to help to incentivise staff and helps our beneficiaries," she says. "One chap who has been through the programme is in his late 30s and has hardly worked. Since he's come out of prison we've helped him to move areas and reduce his drug use, and so far he's not reoffended."

But she admits PBR contracts present a cash-flow problem for third sector providers. "If PBR is going to remain the funding style of the future, it would be more manageable if the funds were paid up front with a contractual arrangement to claw them back at the end of the contract or at the review date if key targets are not met."

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